Yesterday I mentioned that the President now has a new target for blame any time there’s a piece of economic bad news. Here he is last Friday.
THE PRESIDENT: So economists are estimating that as a consequence of this sequester, that we could see growth cut by over one-half of 1 percent. It will cost about 750,000 jobs at a time when we should be growing jobs more quickly. So every time that we get a piece of economic news, over the next month, next two months, next six months, as long as the sequester is in place, we’ll know that that economic news could have been better if Congress had not failed to act.
And let’s be clear. None of this is necessary. It’s happening because of a choice that Republicans in Congress have made. They’ve allowed these cuts to happen because they refuse to budge on closing a single wasteful loophole to help reduce the deficit. As recently as yesterday, they decided to protect special interest tax breaks for the well-off and well-connected, and they think that that’s apparently more important than protecting our military or middle-class families from the pain of these cuts.
The President’s initial attempt to blame Republicans in Congress for current and future economic weakness is flawed because House Republicans passed a bill that would have the same macroeconomic effect as the President’s proposal, at least for this year.
CBO estimates the sequester will knock about 0.6 percentage points off the growth rate of GDP in calendar year 2013, and therefore that undoing the sequester (in 2013) would increase GDP growth by the same amount. For the moment I’ll set aside the concerns often expressed on the right about estimating the GDP effects of fiscal expansion or contraction and take CBO’s estimates as given.
The key flaw in the President’s argument is that the first year effects of the House-passed sequester replacement bill and the Senate Democrats’ failed bill are nearly identical. Each would unwind almost all of the 2013 effects of the sequester, and each would therefore increase GDP growth by the same amount.
The proposals differ in the amount and composition of their deficit-reducing offsets, but in both proposals those would be spread out over a long timeframe beginning next year. Senate Democrats proposed to offset in future years all of the $85 B they would spend this year, while House Republicans passed a bill that would reduce the deficit even more in future years. But $8 B (Senate Democrats) to $20 B (House Republicans) of deficit reduction for each of the nine years after this one is too small to show up in any estimate of macroeconomic effects. The competing proposals would have the same growth benefit this year, and similar and trivially small growth costs in future years, beginning in 2014.
The President says there wasn’t a deal because Republicans refused to accept his proposed offsets. House Republicans can make exactly the same argument. This 0.6 percentage point growth drag is because the two sides couldn’t agree, not because one party wanted to fix the problem and the other party didn’t.
I expect the President will fail to mention that CBO also says that the tax increases he championed and got will slow this year’s economic growth by an additional 0.6 percentage points this year on top of the effects of the sequester.